COMPLETION OF THE ACCOUNTING CYCLE UNIT 4

ILLUSTRATION 4-10 STANDARD BALANCE SHEET CLASSIFICATIONS Assets Liabilities and Equity Financial statements become more useful when the elements are classified into significant subgroups. A classified balance sheet generally has the following standard classifications: Current Assets Current Liabilities Long-Term Investments Long-Term Liabilities Capital Assets Owner’s/ Partners’/ Shareholders’ Equity

Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company’s operating cycle, whichever is longer. Listed in the order of liquidity. Examples of current assets are cash, temporary investments, accounts receivable, inventory, and prepaids. CURRENT ASSETS

100 XYZ shares LONG-TERM INVESTMENTS Long-term investments are resources that can be realized in cash, but the conversion into cash is not expected within one year or the operating cycle, whichever is longer. Examples include investments in shares or bonds of another company or investment in land held for resale.

CAPITAL ASSETS Tangible resources of a relatively permanent nature that are used in the business and not intended for sale are classified as (1) property, plant, and equipment and (2) natural resources. (1)Examples of property, plant, and equipment include land, buildings, and machinery. (2)Examples of natural resources include tracts of timber, oil and gas reserves, and mineral deposits.

Intangible assets are noncurrent resources that do not have physical substance. Examples include patents, copyrights, trademarks, or trade names that give the holder exclusive right of use for a specified period of time. CAPITAL ASSETS

Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer. Examples include accounts payable, unearned revenue, interest payable, and current maturities of long-term debt. CURRENT LIABILITIES

Obligations expected to be paid after one year are classified as long-term liabilities. Examples include long-term notes payable, bonds payable, mortgages payable, and lease liabilities. LONG-TERM LIABILITIES

The content of the equity section varies with the form of business organization. In a proprietorship, there is a single owner’s equity account called (Owner’s Name), Capital. In a partnership, there are separate capital accounts for each partner. For a corporation, owners’ equity is called shareholders’ equity, and it consists of two accounts: Share Capital and Retained Earnings. EQUITYEQUITY

ILLUSTRATION 4-17 CLASSIFIED BALANCE SHEET IN REPORT FORM A classified balance sheet helps the financial statement user determine: The availability of assets to meet debts as they come due, and The claims of short- and long-term creditors on total assets. A classified balance sheet helps the financial statement user determine: The availability of assets to meet debts as they come due, and The claims of short- and long-term creditors on total assets. The balance sheet is most often presented in the report form, with the assets shown above the liabilities and owner’s equity.

LIQUIDITY Liquidity measures ability to pay short- term obligations when they come due. Working capital is one important measure of liquidity. WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

CURRENT RATIO The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt- paying ability. It is calculated by dividing current assets by current liabilities and is a more dependable indicator of liquidity than working capital. CURRENT ASSETS CURRENT RATIO = ——————————— CURRENT LIABILITIES